China: Data is expected to show a continued gradual slowing of economy - BBH

Research Team at BBH, suggests that the China data cycle hits high gear in days ahead. 

Key Quotes

“The data is expected to show a continued gradual slowing of China's economy, in which, nevertheless, the lending is accelerating with diminishing returns.  The dollar has risen in ten of the last twelve sessions against the yuan. It has risen in eleven of the past thirteen weeks.  And it is falling faster against the basket the PBOC said it adopted at the end of last year.  The operational policy remains of a "reasonably stable" exchange rate.  Something must be lost in translation.  

However, we are not convinced Chinese officials are engineering the depreciation of the yuan.  Market forces can explain the pressure on the yuan.  Chinese officials appear to have simply reduced its resistance.  In fact, it seems much more likely that if China were adopt a truly free-floating currency, the yuan could fall further and faster than it has done.  On a broad trade-weighted basis, the yuan appreciated nearly 30% from the middle of 2011 through the middle of last year.  Over the past year, it recouped a little more than a third of its decline.  

Many have expressed concern about the deflationary spillover that the yuan's depreciation will cause.  We suggest the decline in bond yields is not being driven by Beijing but by Frankfurt, London, Brussels, and Tokyo.  The yuan's depreciation against the yen is really more a function of the yen's side of the equation.  Also, remember the space China occupies in global supply chains.  Valued-added costs incurred in yuan for exports still appear low by global standards.  

Our concern about a rapid or significant depreciation of the yuan is two-fold.  First, it would aggravate the debt burden of companies that borrowed in dollars (or other foreign currencies). Second, it would make it more seductive for China to dump its surplus industrial capacity (steel, aluminum, glass, cement, etc., etc.) on foreign markets.  Europe is expected to decide soon whether to recognize China as a market economy, which for WTO purposes, means it would be more difficult, but not impossible, to resist dump practices.”